Aviva Investors To Absorb Investment Research Costs

After 3rd January 2018, new rules of the Markets in Financial Instruments Directive 2014/65/EU (MiFID II) will come into force and will affect each investor who engages in transactions in financial instruments. Indeed, just as markets move in cycles, investor sentiment also follows a cycle that repeats itself every seven years or so. Emotions evolve as we progress along the cycle and correspondingly affect our decisions. Understanding this cycle of emotions is not just instructive – it can help us generate higher returns by investing at times of fear and being less sanguine when confidence is overflowing. Hence the trick is to react in ways that will help us make the most of the ride on this emotional roller coaster.

While it is uncertain which model the UK will adopt following Brexit, for now (and unless a UK specific” alternative is found) only UK membership of the EEA would guarantee the continued use of EU/EEA passporting rights for regulated financial services firms (the EU/EEA Passport”). Under certain Directives, the UK could obtain passporting rights (in respect of some services and for some types of clients) as a third country”, conditional on the UK’s financial services regime being determined to be equivalent by the European Securities and Markets Authority (ESMA”) (the 3rd Country Passport”). Please see our previous client alert and blog on passporting for a more detail.

The Markets in Financial Instruments Regulation (MiFIR) will be implemented alongside MiFID II. Unlike MiFID II, as a regulation, MiFIR will be directly enforceable. MiFIR deals less with direct customer orientated obligations and instead covers bigger picture trading issues, in particular pre and post trade transparency. Although these concepts existed under MiFID, they have been expanded considerably and now cover non-equities. Under MiFIR, regulated markets, MTFs and OTFs will have to publish bid and offer prices and information relating to depth of trading interest, very much in the spirit of the G20 Accord. Operators will be interested to learn that such data will need to be streamed continuously during exchange opening hours. Certain low volume products will be exempt from such requirements. However, ESMA is still undecided as to whether to exempt instruments on a class or individual instrument basis.

Recruitment of regulatory subject matter experts is at an all-time high and to balance the books, it appears that internal analyst positions are the target. This is a change in the corporate diet and you know how hard such lifestyle changes can be on a personal level. Intriguingly, share price analysts, so far, seem to have looked the other way in respect of balance sheet impact or overlooked the long tail of financial risk associated with up to seven-year retrospective fines for non-compliant reporting. We will also see if they take count of operational competence, which in extreme cases could lead to decreased trade volumes to reduce risk or place a valuation impairment on firms that are trading at risk.

Pushed to a more negative scenario, could all the brute force of tough regulation actually lead to a systemic failure of market operation? Any decision not to trade, forgoes a chance of wealth creation, giving no return, lost clients and finally, no business. In their regulatory planning, firms have taken the opportunity to strategically re-position their organisations around market places where their expertise and competence will provide them with the best returns. In many cases this has led to withdrawal from markets and letting certain clients go on marginal markets, all in the name of regulation and using budgets underwritten for large scale change. A silver lining maybe delivered after all, a new landscape has been inserted and players reloaded. Flick the switch. Game on!